Leading financial firms over the past five years donated $1.8 million to successful school bond measures in California, and in almost every instance, school district officials hired those same underwriters to sell the bonds for a profit, a California Watch review has found.
The practice is especially pronounced in California, where underwriters gave 155 political contributions since 2007 to successful bond campaigns for school construction and repairs. One major underwriter, Piper Jaffray, has said it gets more requests for campaign contributions in California than in any other state where they do business.
The success rate of these underwriters is extremely high. In only five cases since 2007 has a campaign donor failed to receive a bond-selling contract from the school district.
School districts say they choose bond underwriters for their expertise and competitive rates and because they’ve served them well in the past. And underwriting firms say they contribute only after they’ve been hired to sell the bonds, avoiding any undue influence.
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But critics say that no matter when the agreement is made, the campaign donations influence school districts’ business decisions. They argue that pre-arranged underwriting contracts bypass a truly competitive sale, leaving in doubt whether districts got the best possible deal.
“If this isn’t clear proof of pay to play, then pay to play doesn’t exist,” said Glenn Byers, Los Angeles County’s assistant treasurer, who oversees some school bond sales but doesn’t control the hiring of underwriters. “The timing of the payment is irrelevant. You paid and you got the job. That’s pay to play.”
Some states have banned the practice. Missouri, for one, outlaws donations to bond campaigns from companies with a financial interest in the bond sale.
In the past five years in California, five major underwriters donated $1.8 million to help pass 111 ballot measures, authorizing $15.5 billion in debt. A couple dozen other measures received underwriter contributions but failed at the ballot box.
Overwhelmingly, bond underwriters who donated to these campaigns were granted contracts by school districts.
In nearly all cases, the only underwriters that donated to a successful school bond campaign ended up working on the bond sale. Bond Buyer, a trade publication, found the same pattern in an earlier review of 2010 campaign contributions.
At times, multiple underwriting firms will donate to a single bond campaign. But even there, the success rate is high. In almost all cases in which multiple bond underwriters donated to the same campaign, they all were given contracts by the school district to market those bonds.
For donors, failure is rare. In only five cases out of 111 did an underwriter make a donation and fail to receive a contract to sell the bonds. In four of those, however, more than one underwriter made donations and the contract went to the firm that had contributed a larger amount to the campaign.
Former Assemblyman Joe Canciamilla, a Democrat from Pittsburg, tried and failed to pass a law in 2005 requiring competitive bidding of bond sales. In a competitive sale, which takes place after the election, the underwriter with the lowest bid wins the bonds.
Canciamilla said school districts instead negotiate underwriting deals before bond elections specifically to draw in campaign money. Districts are “in effect negotiating much more attractive deals for the underwriters in order to generate the money necessary to run the campaign,” he said.
Under state law, school districts can’t use their own funds for bond campaigns. That leaves other interested parties – underwriters, builders and organized labor – to pony up the necessary cash. For their part, underwriters have justified the practice to federal regulators by noting that bond campaigns simply need these contributions in order to convince voters.
Last November’s $63 million bond measure for the Newark Unified School District in Alameda County, for example, raised money from architecture and construction firms, the financial adviser and the law firm working on the bond issue, and local construction unions.
The only underwriter to donate, Los Angeles-based De La Rosa & Co., gave $20,000.
“All the money was donated by outside companies,” said Gary Stadler, a parent volunteer who was the campaign’s treasurer. “We said, ‘Hey, we’re going to pass this bond to improve the schools, we need some contributions, are you going to contribute?’ And of course they’re going to, because they’re going to work here.”
The district’s financial adviser, Oakland-based KNN Public Finance, had earlier considered proposals by four underwriters and ultimately recommended De La Rosa, said Newark Unified’s chief business official, Elaine Neilsen.
The district granted De La Rosa up to 1 percent of the bonds – potentially $630,000 in compensation – subject to negotiation before the bond sales. The company donated after signing the contract.
“De La Rosa & Co. respects and abides by the selection process of California’s school districts,” Chief Financial Officer Arthur Raitano wrote in an e-mail. “Accordingly, we neither discuss or consider contributions to bond ballot campaigns until such districts have selected their professional financing teams.”
Top 5 underwriting firms analyzed
Underwriters typically sign agreements with school districts before the election, and then give money for the political campaign that promotes the bond measure.
Underwriters act as middlemen, buying bonds from districts and selling them to investors. The underwriters buy the bonds at a discount from the district and then sell them at a higher price to their investors. Investors are essentially loaning money to the school district in exchange for regular interest payments and eventual principal repayment.
In February 2011, for example, the Glendale Unified School District picked two underwriters to handle a $270 million bond that would go before voters in April as Measure S. The money will be used to upgrade classrooms, science labs and libraries, and purchase computers, among other promises.
Instead of offering the underwriting contract to other companies, the district selected De La Rosa and RBC Capital Markets because it had worked with them previously, said Eva Lueck, the district’s chief business and financial officer.
RBC gave $25,000 to the “Yes on S” campaign two days after Lueck signed the agreement, according to filings. De La Rosa donated $25,000 a month later.
Lueck noted the donations came after the contract was signed.
“We were very conscious of not crossing any lines,” said Lueck, who also volunteered on the campaign. “We always look to, well, who would this benefit, and maybe they would be willing to contribute.”
After the election, the district issued its first batch of Measure S bonds – $54 million worth. The underwriters bought them at a .5 percent discount in order to collect $270,000 in compensation.
California Watch reviewed contribution data for the five underwriting firms most active in California bond campaigns: De La Rosa, George K. Baum & Co., Piper Jaffray, RBC Capital Markets and Stone & Youngberg. (A Stone & Youngberg managing director for public finance, Tom Lockard, serves on the board of directors for the Center for Investigative Reporting.)
All of the firms profited from bond sales they had supported with political donations.
The list of school districts benefiting from underwriter donations ranges from the tiny Blue Lake School in Humboldt County to one of the state’s largest districts, Long Beach Unified.
In a twist on the usual practice, Piper Jaffray last year contributed to three bond campaigns after the elections were over.
In one case, the Centinela Valley Union High School District in Los Angeles County hired Piper Jaffray in November 2010, the month voters approved a $98 million bond measure.
Well after the election, Piper Jaffray made a donation that may have indirectly benefited two school board candidates instead of the bond campaign.
In April 2011, Piper Jaffray gave $25,000 to Citizens for Better Schools, the committee that had championed the $98 million bond measure. The committee had cash reserves and no debt, according to campaign filings.
Later that year, the committee spent $53,000 campaigning for two school board candidates, one of whom unseated an incumbent.
Bond underwriters rarely give campaign donations to individual candidates or local elected officials. Federal regulations bar underwriters from doing business with a public agency within two years of giving campaign donations to an official of that agency.
A donation to a committee “that the contributor knows or reasonably should know” is backing an official is the same as giving directly to the official, according to an e-mail from Ernesto Lanza, deputy executive director and chief legal officer of the Municipal Securities Rulemaking Board. The self-regulatory agency’s rules carry the force of federal law.
“It’s those kinds of things, whether they’re innocent or not, that create a certain appearance of impropriety that creates part of the problem here,” said Canciamilla, the former assemblyman.
Neither the Citizens for Better Schools nor Piper Jaffray responded to requests for comment.
Piper Jaffray’s official policy reads, “We will not make, or indicate a willingness to make, any financial contribution as a condition to being retained as an underwriter."
Centinela Valley Superintendent Jose Fernandez said the district chose Piper Jaffray because of the firm’s extensive experience, and the board unanimously approved the decision. He said he was unaware of the contribution.
“I don’t know anything about that,” he said. “We stay out of it.”
The district’s contract with Piper Jaffray specifies, “The Underwriter is not obligated as a result of this agreement to make a campaign contribution in connection with the bond election, nor has it otherwise committed to make a campaign contribution.”
Reporting campaign donations
In 2010, in response to pay-to-play concerns, the Municipal Securities Rulemaking Board began requiring underwriters to report bond measure donations to the self-regulatory agency. The board is analyzing the data reported so far, before determining whether additional regulations are necessary, Lanza said.
The correlation between contributions and school district contracts “adds to the evidence that there’s certainly something to be looked at,” he said. “It sounds like there’s a little bit of smoke there.”
Some firms decline to make donations, such as O’Connor & Co. Securities, which is underwriting a bond passed last year in Monterey County.
“As a firm policy, we avoid participation in campaign contributions solely to avoid the appearance of a conflict of interest, even though at times this could put us at a competitive disadvantage,” said company President Will O’Connor.
The one case in which an underwriter made a contribution but the contract went to firms that didn’t give money occurred in the San Mateo-Foster City School District in 2008. Piper Jaffray gave $25,000 to support a $175 million bond measure there.
But after the election, the district instead selected Stone & Youngberg and RBC Capital Markets to sell the bonds. Those companies, neither of which made donations, simply offered a better deal, said Micaela Ochoa, the district’s chief business official at the time.
Ochoa said she solicited donations as a campaign volunteer on her own time, but made it clear that contributions wouldn’t guarantee a contract. Some firms didn’t want to give without any promises, she said.
“People would ask me, ‘Why are you even calling them?’ ” Ochoa said. “It is harder, but it’s also cleaner.”